Quick note re GDP Q1 report: Keep your eye on the trend

April 28th, 2017 at 11:28 am

The economy grew at a slow rate of 0.7 percent in the first quarter of this year, according to this morning’s GDP report. But that low number–headlines stressed that it’s the slowest rate in three years–should be largely discounted. The underlying trend growth rate of the economy remains a moderate, and pretty steady, 2 percent.

There’s been a problem with seasonality in Q1 data of late, and growth rates for the quarter appear to be somewhat biased down. Also, January and February were unseasonably warm, so people spent less on heating (otoh, there was more building than we’d have expected).

The best way to control for this problem, as well as smooth out some of the noise in the annualized quarterly data, is to look at year-over-year trends. That way, if GDP levels in Q1s are biased down, this approach will factor that bias out (since they’ll be biased in each Q1). As you see in the figure, we’re right on trend.

Source: BEA

A few observations:

–Business investment growth was strong last quarter, but part of that was driven by a huge 22% (quarterly, annualized) jump in buildings, which may be a weather effect, as noted above.

–I’m putting consumer spending, which comprises 70% of GDP, on my watchlist. Nothing dramatic, and the 0.3% annualized rate in Q1 is not going to stick, but it has decelerated a bit of late. As I wrote earlier this month, slower job and real wage growth, the latter a function of faster inflation, looks to me to be taking a small bite out of that key component.

–Price growth remains quiescent. The PCE deflator, yr/yr, is up 2% and the core PCE, the Fed’s preferred gauge, is up 1.7%, where it has been for the past year.

–In other words, nothing in this report should lead the Fed to worry about capacity constraints creating price pressures.

–And, ftr, nothing in here, or anything else I’ve seen, not just today, but in my life, should lead anyone to believe that Trump’s one-pager tax “plan” will take real GDP growth from its trend growth rate of 2% to 3%. To be clear, there will be strong quarters down the road, and administration officials will say foolish things about them. But keep your eye on the trend.

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2 comments in reply to "Quick note re GDP Q1 report: Keep your eye on the trend"

  1. AngloSaxon says:

    The U-6 has fallen from 10% to 9%(rounded) over the last year, so yeah, it is steady as it goes. I think where the most interesting issue coming is the productivity slowdown. Both the 90’s and 00’s had that surge in productivity beyond capacity imo, that led to the appearance that the U-6 at 7-8% doesn’t cause non-oil based “inflation”. I am not sure we can support that this time with flat productivity growth. I don’t think the slowdown is out of line either. The 95-05 burst created a abnormal level of productivity growth that was not sustainable and was out of line. So we are in correction. Interestingly, both the boost and dump occurred during demographic peaks of the Baby Boomers and Generation X’s spending power.

    Republican tax cuts could cause a asset explosion being only 1% away from a 8 on the U-6 giving a short lived pop to growth, that will not be good in the short run or long run when the bubble bursts. I think Bond Markets are to complacent in their thinking creating abnormally low real interest rates further boosting asset prices. What happens? Inflation spikes toward 4-5% rattling markets and flight from long range bonds finally boosting real rates up to inflation, but the damage is done.

    I don’t see this happening up until the summer of 2018 at the earliest, but I think being “children of the 90’s” isn’t necessarily a good thing. Conditions have changed and productivity is not there for the valve release this time.


  2. Smith says:

    Could there be a worse representative of progressive values than Bill Bradley? Was there ever a greater sell out of the New Deal than the deal Bradley and Tip O’Neil made with Reagan? Reducing the top marginal rate from 50% to 28% was the greatest give to the 1% in the history of government. Bad as Kennedy’s 90% to 70% reduction, or Reagan’s first 70% to 50% reduction, this was truly an order of magnitude more reprehensible, cynical, despicable and calamitous.
    https://www.nytimes.com/2017/04/29/opinion/sunday/when-congress-made-taxes-fairer.html
    While Trump may even drop the pretense of “lower the rate, broaden the base, revenue neutral” cover for politicos concerned about a few pundits remarks, Bradley et al paved the way for the new era of inequality. He was no more a serious liberal, ever, than Ryan is a practicing conservative. How he ever challenged Gore from the left in 2000 only attests to Gore’s one weakness and shallowness.
    Might not we hear some opposition as Bradley makes the case for passing Trump’s tax cuts if only they just close enough loopholes? That’s stupidity, and echoed by Obama and Clinton who were all to willing to lower corporate rates and declare a tax holiday for repatriation for a quick fix one time boost in revenue and a few temporary loop hole denials.

    There is no left, left, we can only wait for true New Dealer to propose restoring the 90% marginal rate (on $1 million in today’s dollars 1943 – 1963) that once made our country strong, with a vibrant middle class and growing opportunity.

    Doesn’t anyone know any history? Even economists? And don’t say impossible since a few years ago $15/hour minimums were impossible.


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